Kraft Foods Inc. (KFT) posted third quarter 2011 operating EPS of 58 cents per share, surpassing the Zacks Consensus Estimate of 56 cents by 3.6%. It also went up 23.4% from 47 cents reported in the prior-year quarter.
Management credited the benefits of increased investments in marketing and innovation, effective advertising and focus on End-to-End Cost Management for strong results in the quarter. Operating gains, favorable foreign currency and discrete tax items also contributed to the profit.
Including the Integration Program costs of 6 cents per share, reported earnings were 52 cents per share in the current quarter. The prior-year quarter includes the Integration Program costs of 5 cents and acquisition-related benefits of 1 cent per share, which resulted in the reported earnings of 43 cents per share.
Following the strong results, Kraft revised its 2011 operating earnings guidance to at least $2.27 from at least $2.25.
Revenues and Margins
Revenues in the quarter soared 11.5% to $13.2 billion, while organic growth was 8.4% driven by strong top line growth in all regions. Pricing accounted for 7.0 percentage points of growth and volume and mix contributed 1.4 percentage points. Revenues surpassed the Zacks Consensus Estimate of $12.8 billion.
Revenue grew in each of the geographies with the Developing Markets leading the race with a double-digit growth in revenue of 20.3%, reflecting the benefits from continued focus on Power Brands, core categories and key markets. In addition, revenues increased 4.4% in North America and 16.1% in Europe.
Kraft also revised its organic revenue guidance for 2011 to at least 6% from at least 5%.
Kraft’s operating income grew 11.8% to $1.7 billion, while operating margin was the same for both the current and the prior-year quarters at 12.8%.
Excluding acquisition-related and Integration Program costs, underlying operating income surged 12.2% to $1.8 billion, driven by effective input cost management, favorable foreign currency and volume/mix growth. However, these were partially offset by SG&A expenses and the negative impacts from the Starbucks CPG business, a unit of Starbucks Corporation (SBUX). Underlying operating margin also increased 10 basis points (bps) to 13.7% in the third quarter of 2011.
Operating margins were achieved by effective input cost management, while leveraging overheads and driving integration savings.
Other Financial Details
As on September 30, 2011, Kraft had $2.0 million of cash and cash equivalents compared with $2.3 million at the prior year quarter end.
Kraft’s plan to spin off its North American grocery business to its shareholders and split itself into two independent public companies are on track. It will split into a high-growth global snacks business with estimated revenue of approximately $32 billion and a high-margin North American grocery business with estimated revenue of approximately $16 billion.
Global snacks will consist of the current Kraft Foods Europe and Developing Markets units as well as the North American snacks and confectionery businesses. The North American grocery business would consist of the current U.S. Beverages, Cheese, Convenient Meals and Grocery segments and the non-snack categories in Canada and Food Service.
Kraft pointed out that until the separation is over, the business will continue to be managed and reported as part of U.S. Snacks. Further, Kraft stated that the North American Grocery company will be named as Kraft Foods, as it has very strong consumer recognition and brand equity in the U.S. and Canada. On the other hand, the name for the Global Snacks company will be decided by a shareholder poll in May 2012.
The Way Forward
The company continues to make tangible progress in cost management, primarily driving negative overhead growth to cut costs and improve effectiveness.
Further, we are encouraged by the company’s recently strengthened business model by increasing investments in promotion and marketing that increased its pricing power and improved product positioning. These initiatives are paying off now, and margins are improving.
Furthermore, the combination of Kraft and Cadbury is expected to provide meaningful revenue synergies. Kraft also plans to capture 70% of the cost synergies by year end 2011, and expects revenue synergies to contribute about 50 basis points to top line growth in 2011.
However, higher commodity costs, increased marketing expenses, competition from private labels and presence of tough competitors like Unilever Plc. (UL) and ConAgra Foods Inc. (CAG) concern us.
Currently, we prefer to rate the stock as Neutral. Further, Kraft Foods holds the Zacks #3 Rank, which translates into a short-term Hold rating.
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